Seagull Spread

It can be structured for zero net premium, but 'zero cost' doesn't mean 'zero risk.' The sold option creates significant potential loss. Think of it as 'no upfront cost' but with deferred risk - if the sold option is triggered, you face real losses.

Yes. American-style options (most equity options) can be assigned any time the option is ITM. If your sold put is ITM, you may be assigned and must buy the stock at the strike price. Monitor ITM sold options, especially near ex-dividend dates.

You face immediate loss. If your sold put is at 3100 and stock gaps to 3050 overnight, you're instantly down 50 points (S$250 for STI). This is why seagulls are risky around earnings and events - gaps bypass any planned stop losses.

Match your directional view. Bullish = Call seagull (buy call spread, sell put). Bearish = Put seagull (buy put spread, sell call). The sold option is always on the opposite side from your directional view, providing financing.

A naked put has unlimited profit potential (keep all premium) but risk to zero. A seagull adds a call spread for upside participation. If stock rises, seagull profits from spread; naked put just keeps premium. If stock falls, both have similar downside risk.

For bullish call seagull entered at credit: Lower breakeven = Sold put strike - credit. Upper zone: Between sold put and long call, you keep the credit. Profit zone: From long call to short call (capped). Example: Sold 3100 put, credit S$5. Below 3095, losses begin.

Buy back when: 1) Price approaching sold option strike (proactive), 2) Sold option reaches 2× original premium (reactive), 3) Delta of sold option exceeds 0.30-0.35. You'll convert to a simple spread with defined risk, but at a cost.

Yes, but it's often difficult for credit once ITM. Rolling down (for put) or up (for call) and out to later expiration might work. However, you're often just delaying/compounding the loss. Sometimes closing is cleaner than rolling.

Mixed impact. The sold option's theta works for you (decay is profit). The spread's theta works against you (long option loses value). Net effect is usually slight negative theta when OTM, improving if spread becomes ITM. Time is not a strong ally or enemy.

Options: 1) Use risk reversal instead (unlimited profit, same sold option risk), 2) Widen the spread (may cost small debit), 3) Use ratio seagull (sell more options for wider spread - more risk). The seagull's capped profit is the tradeoff for zero cost.

For bullish call seagulls, high put skew is advantageous - the OTM put you sell has elevated premium. For bearish put seagulls, high call skew (less common) helps. Analyze skew before choosing direction - sometimes the skew-favored direction is worth considering even if secondary.

Typically 0.10-0.20 delta for sold option balances premium and safety. Below 0.10: Very safe but minimal premium (hard to finance spread). Above 0.20: Good premium but too close to ATM (higher risk). Adjust based on conviction and IV environment.

1) Limit total seagull exposure (sold options are correlated in market stress), 2) Diversify sold option sides (some bullish, some bearish seagulls), 3) Track aggregate sold option risk across all seagulls, 4) Have portfolio-level stop if total seagull loss exceeds threshold.

Calendar seagull (different expirations) works when: 1) Near-term IV is elevated (sell option in near-term for better premium), 2) You want longer time for directional move (spread in back month), 3) Experienced with multi-expiration Greeks. Complexity is high - not for casual use.

Calculate P&L at: 1) Sold option strike (start of major losses), 2) -10% from current (crash scenario), 3) +10% from current (melt-up for put seagull), 4) At expiration across price range. Also model VIX spike impact - IV increase hurts. Only enter if all scenarios show acceptable loss.